NIESR: Prospects for the UK economy

Assuming a vote to remain in the EU: the UK economy is expected to grow by 2.0 per cent in 2016. Growth will pick up to 2.7 per cent in 2017.

The Inflation rate is expected to average 0.3 per cent this year and 0.9 per cent next

We expect the Bank of England to start raising interest rates in November. Rates will then continue rising throughout 2017, ending the year at 1.5 per cent.

Uncertainty surrounding the outcome of the UK’s referendum on leaving the European Union has probably weighed on economic growth in recent months. But assuming a vote to remain in the EU, we expect an uptick in growth in the second half of this year as delayed investment decisions are implemented.

The EU referendum has also led us to push back the point at which we expect the tightening phase of the monetary cycle to begin, to November of this year. Consumer price inflation is forecast to be below the 2 per cent target in the second half of this year and throughout 2017. From then on inflationary pressures should build to a level broadly consistent with the Bank’s target rate in 2018.

The recent depreciation in sterling can be largely attributed to the risk that the UK will vote to leave the EU. Given this, and our forecast assumption that the referendum will result in a vote to remain in the EU, we expect sterling to appreciate sharply in the third quarter, ending this year broadly where it started in 2015.